Majority of companies in Dubai find access to land as the major obstacle for their business operations.
This was revealed in an economic policy paper by Dubai Economic Council (DEC). It says at least 53 per cent of firms in the emirate find access to land as the biggest obstacle and this has adverse impact on the investment behaviour of entrepreneurs A formal econometric analysis confirms that Free Zone firms are constrained by the prohibition of commercial land ownership and this appears to be a more binding constraint than the perceived uncertainty of the land market regulations in Dubai Main.
However, ‘de facto’ foreign-owned firms in Dubai Main (ie assumed to be those with Emirati sponsorship share at exactly 51 per cent) are likely to be the most impacted. Instead, firms located in Dubai Main where there is an Emirati partnership are likely to resolve or at least contain the consequences of land market problems through the informal networks available to the Emirati business partners.
For firms claiming access to land to be a major obstacle the probability of investing in physical and human capital drops by 22 and 35 per cent respectively. This could even hinder regional and economic development.
A 2010 Enterprise Level Survey revealed 51.3 per cent firms found ‘access to land’ as major obstacle to their business operation, according to the paper.
And considering Dubai population density is low the problem of land access is likely to be associated with institutional and regulatory problems.
The paper, therefore, asks two fundamental questions: what are the regulatory and institutional factors that might have complicated firms’ access to land in Dubai? And what are the consequences of such declared constrain for the future economic development of the emirate?
The DEC paper underlines that the vast majority of entrepreneurs opening and running business in Dubai are foreigners (with only 10 per cent of population being Emirati or GCC nationals and only about 2.5 per cent enterprises are solely owned by locals).
The second aspect is that foreigners wishing to set up a business in the free zone are not allowed to buy land for commercial purpose, i.e., they can only rent land and/or land with built up premises; while they can do so in the free hold areas of Dubai Main. Therefore it is important to understand that for the vast majority of entrepreneurs in the free zones problems of ‘access to land’ could imply ‘access to buying land’; while in Dubai Main it is likely to be associated with ‘access to rental land and/or property for commercial use’.
The third important aspect refers to the sponsorship rules operating in the UAE non-Free Zone that ties each foreigner willing to invest in Dubai with a sponsor (the ‘local’ partner) that acts as the legal representative of the entity in the UAE.
In the case of public and limited shareholdings, the local sponsor owns at least 51 per cent of the shares.
In other words, in a Free Zone has clear rules and regulations that underline the operations of the firm – e.g., regulations for the leasing of commercial property, the cost of leasing or even the fees attached to the leasing permit, among others – are well established and monitored by the Free Zone Authority.
Such certainty is not necessarily a characteristic of the land market in Dubai Main, where the lack of transparent and predictable land regulatory system, especially with regard to adjudication of disputes, adds risk and uncertainty to the operations of firms.
There have been efforts to streamline things such as Real Estate Regulatory Agency (Rera) is monitoring rental price increases and resolving deputes between leasers and landlords.